EU Taxonomy Overhaul Proposed with Expanded Environmental Impact Categories
The Platform on Sustainable Finance, an expert group of the European Commission tasked with advising it on the development of sustainable finance policies, announced today the publication of a new report with recommendations proposing a major expansion of the EU Taxonomy, adding categories for economic activities with significantly harmful economic impact, as well as for those with intermediate performance or low overall impact.
According to the expert group, the proposals aim to help to incentivize finance flows and investments to areas urgently in need of environmental performance improvement, or for exiting those that cannot transition, and to bring a wider variety of economic activities under the taxonomy framework.
The EU Taxonomy is part of the EU Action Plan on Sustainable Finance, established by the EU Technical Expert Group on Sustainable Finance’s (EU TEG). The taxonomy is a classification system enabling the categorization of economic activities that play key roles in contributing to at least one of six defined environmental objectives and no significant harm done to the other objectives.
The EU Taxonomy regulation went into effect at the beginning of this year, following the approval of the EU Taxonomy Climate Delegated Act (CDA), starting with the first two objectives, climate change mitigation, climate change adaptation. The remaining objectives include sustainable use and protection of water and marine resources, transition to a circular economy, waste prevention and recycling, pollution prevention and control, and protection of healthy ecosystems.
According to the report, while the current Taxonomy system is aimed at providing “robust definitions and transparent reporting to support increased finance for activities that substantially contribute to solving climate and environmental crises,” an expanded framework could also help attract investment to help fund improvements in areas that are currently harmful. Additionally, the group notes that for economic activities that have little positive or negative economic impact, not being classified under the current system may falsely generate a negative signal of being “not green.”
Some of the key recommendations in the report include classifying unsustainable performance requiring an urgent transition to avoid significant harm, in order to enable Taxonomy-recognized investment as part of a transformation plan to less harmful performance, and to identify which of these activities that cannot be improved and access financing to fund exiting or decommissioning. The report also recommends introducing an “Amber,” or intermediate category for activities that operate between significantly harmful and substantial contribution performance levels, and a category for low environmental impact, or “LEnvI” activities, enabling entities to demonstrate that their activities do not cause environmental or social harm.
The report also noted that the proposed extensions would provide an alternative approach to classify activities such as nuclear and gas-based energy production, which were included under the Taxonomy earlier this year in a move met with significant protest. The expanded system would better define how these activities fit within economic activities in transition.
In its new report, the Platform on Sustainable Finance said:
“An extended environmental Taxonomy is intended to increase TRANSPARENCY across the entire economy, ranging from green, to low environmental impact, to activities in urgent need of transitioning, to activities to be discontinued. This transparency will help companies and other economic actors tell their own transition stories whilst robustly ensuring that clarity is brought to bear on what really makes a substantial contribution, what makes a lesser but important contribution, and what is actually causing the problem, where urgent action is needed.”
Click here to access the Platform on Sustainable Finance report.